J.P. Morgan Chase

Banking on the future

A giant, merged bank in search of better times

WILLIAM HARRISON'S survival skills are not in doubt. He remains securely in charge at J.P. Morgan Chase, despite presiding over a miserable year. In a magisterial management reshuffle last week, he removed a man tipped as a likely successor, and entrenched some of his oldest allies. Over the past three years, Mr Harrison has put together America's second-largest bank by merging Chase Manhattan with J.P. Morgan, Robert Fleming, the Beacon Group and Hambrecht & Quist, spending over $45 billion at top-of-the-market prices.

Critics point to a stream of high-profile departures: the latest, at the end of last month, was Geoff Boisi, co-head of investment banking. (His consolation prize: around $100m that Chase paid him for his share in the Beacon Group.) Morgan argues that departures have been modest. Of 600 employees identified as valuable at the time of the deal, only one-tenth have left—with three times as many coming from J.P. Morgan as from Chase.

Recently, Morgan has seemed to star in every debacle, from Enron's bankruptcy to Argentina's default. It is embroiled in litigation over a $1 billion surety bond which the bank bought as protection against Enron losses; the insurers reckon they were misled. There is also a risk of losses from other Enron-related lawsuits.

Morgan could have done worse. Even if the surety case is lost, the bank will still have produced a profit last year, of several hundred million dollars—admittedly far short of the $7.5 billion earned in 1999. Its commercial bank dominates syndicated lending in America. Return on equity for products tied to custody, clearing, cash management and the like exceeds 22%. Traditional retail banking is almost as lucrative. And the merger of J.P. Morgan and Chase Manhattan has helped derivatives—J.P. Morgan's strong suit—to produce a third of investment-banking revenues.

Morgan blames its lousy results on the environment, not on its own actions, and says its mergers cannot be judged during a financial downturn. Results last year were hurt by three, singular factors: a $1.8 billion loss in its venture-capital portfolio, a doubling of credit losses thanks to America's recession, and a $3 billion fall in revenues from investment banking. If markets at least stabilise, the bank's profits could rise by a few billion dollars. J.P. Morgan Chase considers its pain to be less than that felt by purer investment banks such as Goldman Sachs, Merrill Lynch, and Morgan Stanley, which depend more on strong equity markets and a steady flow of mergers-and-acquisitions activity.

Meantime, Mr Harrison busily teaches “leadership” to his staff. He spends two-and-a-half days each month with groups of 100 employees, who get to play ping-pong with the boss and discuss what they would do if made chief executive. Such “soft” issues will determine Morgan's fate, says Mr Harrison, and it was in this area that Mr Boisi fell short. Recently, the man known as “Darth Vader” publicly criticised the low productivity of Morgan's bankers compared with those at Goldman. Mr Harrison seems to have decided that friendly fire was something he and his colleagues would do without.